A Potential Silver Lining Amid the Crisis of Confidence

The shakeout continues through the aftermath of the U.S. debt downgrade and ongoing concerns regarding European sovereign debt. Making matters worse, discouraging domestic economic readings are mounting with the latest coming from manufacturing and for-sale housing. Accounting for the usual lag in vital economic indicators, these readings confirm that consumers and businesses began pulling back even before the mishandling of the U.S. debt-ceiling resolution and the downgrade of U.S. debt that sent equity markets around the world into a tailspin. The magnitude of the additional weight the current fear factor will place on economic activity will take time to assess, but real estate owners and investors need to be prepared for economic stagnation — if not a contraction — over the next several months. The good news is that all property types have stabilized over the past year and the sector is much better positioned than it was going into the 2008-2009 period.

As stated in my previous blog, the last thing an already fragile recovery needed was a new bout of fear and uncertainty. Unfortunately, that is what has been caused by Europe’s debt-problem patching and our government’s failure to implement a plan to shore up the recovery in the short term and regain fiscal balance in the long-term. Forecasting how we might get through this period warrants a look at the nature and causes of the current issues, and not bundling the reaction with what might have been appropriate during the 2008-2009 crisis. The current dynamics are more about the political paralysis in dealing with structural issues that erupted in 2008 than new problems with the global economy. The transfer of debt from the private sector to the public sector in the form of massive stimuli was necessary to stop the downward spiral that would have led to a depression three years ago, but the political fumbling of solutions to re-establish fiscal balance at the right pace was unnecessary and avoidable. Unlike three years ago, there is much less political will and room for large-scale stimuli, especially since the global focus has shifted toward reining in deficit spending. Given the Fed’s already-bloated balance sheet, it seems few if any tools are now available to stimulate the economy. Therefore, short-term moves to boost equity markets, at least temporarily, are less likely.